Historically, timberland has been a Cinderella asset of limited appeal, except to those who appreciated its commercial value. But today, forestry has become a keenly-sought after asset for pension funds as they scramble for investments that could satisfy their overall ESG commitments, Florence Chong writes
In October, Unisuper outlaid some $300 million to buy a one-third share in a large forest plantation, worth more than $1 billion in Tasmania, as an equal partner with a British and a Dutch pension fund.
The deal continues a run of UniSuper forestry investments in recent times but marks its first involvement with the Sydney-based global forestry manager, New Forests, which sold the asset from one of its funds, and continues to manage the plantation.
Unisuper’s co-investors are the UK’s Pension Protection Fund (PPF), and APG Asset Management on behalf of its Dutch pension fund client, ABP.
The asset is a 17,000-hectare plantation forestry estate, one of Australia’s largest plantation hardwood estates by productive area, consists of vertically-integrated assets and operations.
Commenting on the investment, Sandra Lee, Head of Private Markets at UniSuper, says the fund is ‘delighted’ to be investing in an asset of this scale and quality.
“This adds further momentum to our growing private markets and forestry portfolios, as we continue to be on the lookout for quality investments,” she tells [i3] Insights.
The latest investment has increased UniSuper’s forestry portfolio to close to $2 billion. UniSuper is the proud owner of three forestry businesses in Australia and New Zealand.
The fund’s foray into forestry came in the early 2000s when it invested with Hancock Natural Resources, now known as Manulife Investment Management, in a large Victorian asset, Hancock Victorian Plantations.
In 2007, UniSuper made what was then its single biggest direct investment, acquiring a 15 per cent stake in the New Zealand forestry assets of a now-defunct New Zealand firm, Carter Holt Harvey, at the time a prominent public company.
In that transaction, UniSuper was part of a consortium led by the US manager, Hancock, to take over approximately 200,000 hectares of timberland and forestry rights on New Zealand’s North Island.
Forestry investment at the time was no different to other commercial undertakings, with income deriving from the felling of logs and sale of timber to the local construction industry, or export to Asia for wood pulp and wood products. Just another investment – as good as the returns it generated.
UniSuper came close to selling out of its timberland in 2010, when it sought to free up capital to fund the purchase of the Port of Brisbane. But the bid consortium lost to Global Infrastructure Partners (GIP).
In hindsight, it was a blessing that the bid fell over. Instead of selling its two plantations in Australia and two in New Zealand, UniSuper refocussed its attention on improved governance in forestry, along with worker health and safety.
Additionally, it took the opportunity to top up its holdings whenever an opportunity presented.
The main assets in its portfolio today are the Hancock Victoria Plantation and the Taumata and Tiaki plantations in New Zealand and, now, the Tasmania asset, which comes with a forestry management business, known as Forico.
“Forestry is a play in supporting the whole decarbonisation trend. As the world decarbonises, there is increasing emphasis on the importance of investing in natural resources,” says Lee.
In Australia, people are progressively stopping the use of plastics – from packaging to single-use plastic cutlery. So the use of timber is going up, and timber is a finite resource
She tells [i3] Insights that in a world moving into renewables and the circular economy, the role for timber will grow. Demand for renewable materials is increasing as people look to wood products to replace a range of daily-use items.
Wood is seen as a store of carbon in buildings, wood fibre is used to replace oil-based polyester in the making of fabrics, and there is a widening range of products, from nappies to fabrics and new building materials.
Lee says that as demand grows exponentially, the world is going to be potentially short of fibre. As the use of oil-based products, such as plastic, is phased out, timber is being used to replace plastic in the manufacture of many products.
“In Australia, people are progressively stopping the use of plastics – from packaging to single-use plastic cutlery. So the use of timber is going up, and timber is a finite resource.”
Timber production is also at the mercy of climate change. Bushfires present a natural hazard to forest, wiping out hundreds of hectares of forests during the last major fires in NSW and Victoria in 2020.
As a consequence, Lee says: “Australia is short of timber, so we have to import. It shows how much demand there is in Australia. Wholesale prices for timber reflect this shortage.”
The value of forest goes beyond the sale of timber. Embedded in each tree and each forest is carbon dioxide.
Timberlands themselves are seen as carbon sinks, and carbon generated by trees is used to trade for carbon credits, in turn, used in carbon offsets. According to the London-based research group, Refinitiv, the value of traded global markets for carbon dioxide permits reached a record US$908 billion in 2022.
Lee says: “For us, the strong fundamentals are very compelling. The macro-economic thematic is strong, and we also like the fact that forestry is a portfolio diversifier to infrastructure generally.
“The other key benefit is that we get, what we call, biological growth and that has no correlation to other asset classes, especially to general equities.”
She explains the concept of ‘store-on-stump’ in the forestry sector. “At times, when timber pricing is not attractive, you don’t harvest and instead store the value in the trees, or on the stump,” she says.
“Actually, in doing so, the value of each tree increases as it gets bigger and older. So, we can wait until the market is favourable before we get our product into the market. We like this element of forestry. It gives us the flexibility of when to harvest.”
At times, when timber pricing is not attractive, you don’t harvest and instead store the value in the trees... Actually, in doing so, the value of each tree increases as it gets bigger and older. So, we can wait until the market is favourable before we get our product into the market
Another characteristic of timberland is the land it sits on. “Land value appreciates over time, and it gives you the optionality in its use in future. It gives you so many possibilities.”
Lee and her team are pondering new possibilities to enhance returns from the fund’s forestry portfolio, including the marrying of forestry with renewable energy.
“We have these large forest estates, and we are talking to windfarm developers on the potential use of our land,” she says. “Forests are generally wind-rich areas. We think it may be possible for windfarms to be installed in pockets of the land.”
Lee says it would be ‘terrific’ if windfarm developers are able to build on some of UniSuper’s plantations.
Aside from carbon credits generated by the trees, such estates would add another element of sustainability through the windfarms on the land.
With the Paris climate agreement and United Nations sustainable development goals hanging over their investment decisions, ESG obligations loom large for all institutional investors.
Faced with these imperatives, one asset class—forestry – stands out as being the solution of both ESG targets and sustainability obligations.
Traditionally, Timberland has been a Cinderella asset of limited appeal, except to those who appreciated its commercial value. Today, forestry has become a keenly-sought after asset for pension funds.
Demand for investment in plantation forests has sky-rocketed, especially over the past two years, as pension groups and other institutions scramble for investments that could satisfy their overall ESG commitments.
This is where Australia’s leading industry fund, UniSuper, is streets ahead of its domestic and global peers. Indeed, it stands alone as the only super fund in Australia to have a significant exposure to forestry.
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[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.